Retirement planning is no small task. As life spans increase, you may have to add caring for your aging parents to your own list of retirement concerns.
There’s a potential retirement crisis in the offing and it’s not necessarily your own. As you map out your plans for financial security in an uncertain future, you should also be thinking about caring for aging parents.
Why? Because people are living longer—and it’s surprising even them.
According to the Social Security Administration (SSA), men who reach 65 today can expect to live, on average, to age 84.3. Bump that even higher for women, who can expect to live until, on average, age 86.7. And, as the SSA reminds us, those are just the averages—one out of every four 65-year-olds today will live past age 90, and one out of 10 will reach 95 or older. Living longer can mean added health care and long-term care costs, including sometimes-pricey in-home services or perhaps nursing home costs, that may stretch an entire family’s savings.
In other words, there’s a growing need for income that is guaranteed to last a person’s entire life, as many people are living longer and are concerned about outliving their assets. While there are a number of alternatives regarding how to handle long-term care expenses, here are two:
Many Gen Xers and the Ys right behind them already know these longevity statistics and are factoring them into retirement planning. Younger Boomers, too. Their parents, however, didn’t necessarily count on living this long, and many of them are ill-prepared. According to a 2018 study by the National Bureau of Economic Research, a mere 10% of the elderly have long-term care insurance. Are your parents among them?
They may be able to subsist on Social Security and/or a nice pension with some supplementary income through dividends or withdrawals from Individual Retirement Accounts (IRAs). But what happens when Alzheimer’s, mobility issues, or some other health curveball barrels in? What happens if the value of a home or an investment portfolio goes south just when those assets are needed most? That’s when the real financial pain begins. Caring for elderly parents can be very, very expensive.
Let’s look at the hard, cold facts about long-term care: It can eat up all your assets in no time at all.
Like real estate, the prices depend on location, location, location. The costs for similar care can vary greatly from one region to another, according to research by Genworth, the largest seller of long-term care insurance. This can mean large differences in the regional cost of insurance.
In Chicago, the average cost of a home health aide will set you back $24 an hour, according to the 2018 Genworth Cost of Care Survey. Just one year of that and the total bill rings up quickly to about $37,000—and that’s for only six hours per visit, five days a week. Someone else has to stand in the rest of the time.
It’s a little cheaper in Richmond, VA, where the per-hour price is $20, or a shade above $31,000 a year.
If Pop were put in a nursing home in Chicago, the average per-day price tag is $241, or about $88,000 a year. In Richmond, it’s pricier per day in a nursing home, at $260, or about $95,000 over the same period.
Let’s take it to Seattle, where the per-hour cost for in-home care comes in at a whopping $31.95 an hour, or $50,000 a year. And if a nursing home is needed, the prices spiral to $304 daily, or $111,000 a year.
Not all families can afford the prices in this small sample. Medicare doesn’t cover hospital or nursing home stays over 100 days, so don’t count on that. And Medicaid is available only if your assets are next to nothing.
Income-paying annuities may be a piece of retirement planning worth a closer look.
“Annuities are typically set up to generate income to cover the the core needs, i.e., the 'must haves' later in life," says Matt Sadowsky, Director of Retirement & Annuities at TD Ameritrade. “The idea is to have the expenses you always want to be able to pay, such as food, clothing and housing, covered by income that’s guaranteed to always be there, for the rest of your life,” he says.
One alternative to consider to help cover long term care costs, according to Sadowsky, is a Deferred Income Annuity (DIA). A DIA lets you put money into the annuity today and defer the start date for the payout stream until some point in the future. “For instance,” he says, “a 60 year old can buy a DIA today and start the payout at age 80. Because the annuity’s guarantor—typically an insurance company—holds the money for 20 years, the payout is much larger than if the payments began immediately. That larger payout keeps going as long as the person lives,” he says. “At age 80, if the person has long term care costs, the payment stream can be used to cover those expenses.”
Sadowsky says long-term care insurance policies typically require proof of the individual’s inability to engage in at least two “activities of daily living” (ADLs) such as getting dressed, bathing and moving around the home. Plus, long-term care insurance also charges premiums along the way. “With a DIA, however,” he says, “you know exactly what you’re getting in annuity payments, and you get them whether you need long-term care or not.”
Another alternative is a single-premium immediate annuity, (SPIA), which is typically an emergency purchase when long-term care is needed. In this case, the assets are no longer accessible by the individual. Instead, those assets become the property of the insurance company in exchange for a guaranteed lifetime income stream. Because the individual uses the assets to buy the guaranteed income stream, it should bring down his/her total net worth for Medicaid purposes and perhaps even low enough to at that point qualify for Medicaid.
But Sadowsky issues a word of caution: "Not all SPIAs are Medicaid compliant. It is extremely important to make sure that the SPIA you purchase is Medicaid-compliant if you have any intention of relying on Medicaid in the future. Net worth is only one test to determine if you qualify for Medicaid; the other test is income level. If you earn too much income, you won't qualify." For anyone considering an SPIA in hopes of qualifying for Medicaid, Sadowsky says to make sure the annuity is properly titled when it's set up. Typically, the state Medicaid agency is named as the remainder beneficiary, and the monthly income stream must go to someone (such as a spouse) other than the person seeking to qualify for Medicaid.
Keep in mind that the best family time may be spent asking some tough questions about multi-generational retirement planning, including meeting nursing home costs and other long-term care expenses. It's never too early to have the long-term care talk.
After all, a birthday cake crowded with candles is a good thing; financial surprises in our golden years are not.
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